Late payments can be a real headache for small businesses. Cashflow gets squeezed, stress levels rise, and time is wasted chasing money rather than focusing on growth. According to the Federation of Small Businesses (FSB), around 52% of small businesses experience late payments, with an estimated £23.4 billion owed in unpaid invoices. That’s a serious issue, but there are ways to take control and reduce the impact on your business.
Set clear payment terms upfront
One of the best ways to prevent late payments is to be clear about your terms from the start. Make sure your invoices state the following:
- The due date (e.g., “Payment due within 14 days”)
- Your preferred payment method
- Late payment penalties (if applicable)
A clear, professional invoice leaves little room for confusion. Using accounting software with automated invoicing can also help by sending reminders before and after the due date.
Invoice promptly and correctly
Mistakes on invoices give clients an excuse to delay payment. Double-check that all details are correct before sending, including:
- The correct client name and address
- The agreed price and payment terms
- A full breakdown of goods or services provided
It also helps to invoice as soon as the work is completed. The sooner the invoice goes out, the sooner payment can be made.
Offer multiple payment options
Making it easy for clients to pay can speed things up. Consider offering:
- Bank transfer: The most common method
- Direct debit: Useful for repeat payments
- Online payment platforms: Such as PayPal or Stripe
- Credit card payments: Some clients prefer this option
If a customer has fewer obstacles, they’re more likely to pay on time.
Send reminders and follow-ups
Some clients will forget or delay payment even with clear terms and prompt invoicing. A gentle reminder can make a difference. A good approach is:
- This is a friendly reminder before the due date: A short email saying, “Just a heads-up, your invoice is due in a few days.”
- A firm reminder after the due date: If the payment is late, a direct but professional message is needed.
- A phone call if needed: Speaking to the client can help clear up any issues quickly.
Most businesses don’t intend to pay late, but having a system ensures that those who do are followed up consistently.
Charge interest on late payments
If a client continues to delay, you have the legal right to charge interest under the Late Payment of Commercial Debts (Interest) Act 1998. This allows you to charge 8% plus the Bank of England base rate on overdue payments. You can also claim reasonable debt recovery costs.
While you might not want to apply this charge immediately, making clients aware of it can encourage them to pay on time.
Consider a payment plan for struggling clients
Some clients may be struggling with cashflow. If they reach out and explain the situation, offering a structured payment plan could be an option. Spreading payments over a few months can help recover the money without damaging the client relationship.
Know when to escalate late payments
If all else fails, it may be time to take further action. Options include:
- A formal demand letter: A solicitor can draft a letter before legal action.
- Debt collection agencies: They charge a fee but can take over the chasing for you.
- Small claims court: For debts under £10,000, this can be a cost-effective solution.
Taking legal action should always be a last resort, but having a clear policy makes it easier to act if needed.
Protect yourself for the future
To reduce future risks:
- Run credit checks on new clients: This helps spot potential problems early.
- Ask for deposits or staged payments: Spreading payments reduces risk.
- Strengthen contracts: A solid agreement helps avoid disputes later.
Late payments will always be a challenge, but they can be managed effectively with a clear process and the right systems in place.
Key takeaways
Late payments might seem like an unavoidable part of running a small business, but with the right systems, you can stay ahead of the game. Clear payment terms, prompt invoicing, and consistent follow-up all play a major role in reducing overdue bills. For those clients who genuinely struggle, a sensible payment plan can preserve the relationship while still protecting your bottom line.
Above all, never hesitate to seek professional advice if late payments are starting to bite. At James Scott, our goal is to help you streamline your processes, safeguard your income, and minimise financial risks. With a proactive strategy and the right support, you can keep your focus on growing your business – and not worrying about unpaid invoices.
If you’re ready to put an end to late payment stress, get in touch and let us guide you towards healthier cashflow management.
